Meltdown

0:00Please give a rousing, bold welcome to Dr. Thomas E. Woods, Jr.

0:20Thank you guys very much. Thank you very much. Well, there's a very small sliver of the human population that hears the words, there's an economics lecture going on this Friday night, it then shows up for them. So, God love you people. Thank you so much. Secondly, I have a word of consolation for those of you who do not win the raffle. You can still get copies of the book using those green pieces of paper in your wallet. My wife, who's so wonderful, will be assisting me in this, so thank you very much.

1:08And I'm not going to guilt you into buying my books, I want you to buy them only on their Merits, I'm not going to mention we have three small children, you know, their tricycle is falling apart, totally irrelevant, just merit alone. Well, let's see, I don't have a clock, so I'm going to put, is there a clock in the room? Oh yeah, but if I keep looking over there, you'll think, man, has he got another appointment? My guess is he hasn't got any, so let's see, let's see if we can balance this down here, and when I look down here, you'll think I'm looking at my notes. In fact, most of what I have here are just a couple of quotations that I want to share with you a little bit later. So what I want to do tonight is try to give you a different perspective on the economic crisis from what you're likely to have heard. Now, again, this is a self-selected group. Many of you will have heard the rough outlines of what I'm going to tell you.

1:57But I was actually pleased to see that there are some people in this room who identify themselves as being on the left. on the left. How wonderful that people are open-minded enough to say, you know what, I'm probably going to detest this guy, but I'm going to go listen to him anyway. I hope you won't detest me. You'll actually find me a really warm, nice guy. Honest to goodness. I'm not bad. I'm nice, okay? But I hope that when you leave here, you will say, okay, maybe I don't buy this guy's whole package. But he raised some ideas I've never thought of. He's raising questions nobody's answering, nobody's even asking, but they seem to deserve answers. And I'll be satisfied. I'll be satisfied if you think that. And, you know, if you buy a book on the way out, particularly.

2:45Because the new one, the one I'm promoting these days is called Meltdown. It's about the economic crisis, and we saw it on the screen a little while ago. And in fact, we're seeing it right now. Good old Israel Anderson. He knows what he's doing, I'm telling you. Well, I wrote this book in great haste in order to bring it out early this year. It came out February 9. And I wrote it, and it talks about events, going through December 2008. So I had a publisher that was very cooperative and wanted to help me get this out before the public because I thought, I know what's going to happen. There's going to be an avalanche. I should be careful saying that in Colorado. That's a sensitive topic. A whole barrage of books coming out on the economy. They're all going to say the same thing.

3:35They're all going to say the free market doesn't work. You're all a bunch of stupid rubes for believing in it. We tried to tell you, but you wouldn't listen. And so what we need is your overlords need just a little more power, and they'll set everything right. I've heard this before, we're going to hear it a million times, and I thought, wouldn't it be funny if the genuine, pure, free market point of view gets out there before the public, before the anti-market point of view even has a chance to get organized? So thankfully I had a publisher, a Regnery Publishing, that believed in this project, that got it out there. They are so fast and efficient. I've worked with them several times. You send in your manuscript and, you know, then later that afternoon, just for fun, you're going through the book store and somehow your book is already on the shelf. How can this be? So thanks very much to them.

4:23So I'm going to start off by talking about a couple of the factors that led to the crisis that we're enduring right now, that people who, let's say, are on a lot of right-wing talk radio tend to focus on. And I've done an awful lot of these radio programs, and there are a lot of decent people who host and listen to them. They're not all decent, but there are some who are decent. And they tend to focus on a couple of factors. And I want to suggest to you that although these factors are not entirely irrelevant, they are really missing the ball here. They're not keeping their eye on the ball by focusing on it. And I want to focus our attention tonight on rather a different call. But let me start with some of the typical ones. First are Fannie Mae and Freddie Mac. We hear a lot about them.

5:09Now, Fanny and Freddie, to make a long story short, and I talk about them in the book, but to make a long story short for our purposes, we'll just say Fanny started in the latter half of the 1930s as expressly a government agency. And then, several decades later, it was ostensibly privatized. Freddie Mac, conversely, began in 1970 as a putatively private organization. And these organizations are involved in the secondary mortgage market, where they have been for a number of years, so that when your bank, in effect, extends to you a mortgage loan, the bank will often not keep that loan on its books, as you know, and can sell that, including the right to all the future monthly mortgage payments, to institutions like Fannie and Freddie.

6:00Well, if Fannie and Freddie really were purely private organizations, There are a variety of odd examples of private organizations. Number one, they enjoyed tax and regulatory breaks that other mortgage-gathering tours did not enjoy. There were a variety of special privileges government granted that they enjoyed, in addition to the line of credit that they got from the U.S. Treasury that was always available. But beyond that, everybody knew, I mean everybody who wasn't a total blockhead knew, that if it should come to that, Fannie and Freddie would be bailed out by the taxpayers. Everybody knew that. And in fact, it turns out everybody was right. That's in fact what happened. So obviously, there is an artificial stimulus to risk in that scenario. You can keep all the big profits, but don't worry, if it goes too sour, you know, the sucker's all the losses.

6:51And so people have argued that this, these special government privileges that these strange, weird, hybrid public-private organizations enjoy, allowed them to attract more capital into the housing market than would otherwise have been possible on a genuine free market. Secondly, people talk about something called the Community Reinvestment Act, which is a Carter-era piece of legislation, but that really only got enforcement teeth from a regulatory point of view in the mid-1990s or so under Bill Clinton. The purpose of this legislation was to target what was alleged to be discrimination in mortgage lending, in lending by banks. And so the argument was that in order to exonerate yourself, in effect, to protect yourself against possible lawsuits alleging discrimination, you as a financial institution basically should be extending loans, not just in the outlying areas of a city, which is on the periphery, But really in the community itself. And if you are not extending loans according to some percentage that a government agency will determine, then in effect the presumption is that you are guilty of discrimination.

8:09And it becomes difficult in court to prove that you're not guilty of discrimination. Because what are you going to do, put a Spengali on the stand? How are you going to prove that you didn't intend to discriminate, that it just happened to turn out this way? Well, in fact, it's impossible to do that. And so what in fact happened was the banks began to engage in, in effect, affirmative action in lending. And that's not a controversial statement, because people who supported the Community Reinvestment Act called it that. They expressly said, this is affirmative action in lending. In fact, when AcuBank was taken to court for discrimination and was found guilty, it was saddled with a punishment of $2.1 billion that had to be allocated to inner-city mortgage loans, and the Secretary of Housing and Urban Development at that time, Andrew Cuomo, actually said that, yeah, I'm sure that the mortgages, mortgage loans they extend under this penalty will be riskier, there will be higher default rates than will other mortgages in the bank's portfolio.

9:14So again, it's not like this is some crazy theory that Rush Limbaugh thought. I mean, people at the time said this. They said, yeah, sure, this will happen. Absolutely, this will happen. But, you know, that's the punishment. What I want to suggest to you, though, is that if these factors aren't altogether red herrings, They are, nevertheless, grossly overstating in their importance. I want to suggest there's another institution that deserves our attention, and that's an institution that most of us are taught really to ignore, that don't worry, your betters are in charge, you don't even need to be knowledgeable about this, in fact, it's probably better that you not really know anything about it, and that's the Federal Reserve System. Now, most people hear Federal Reserve System and their eyes glaze over and they think, I have no idea what this thing is. I'm never going to understand how it works. This is too complicated. I better just let the experts deal with this.

10:08Well, there's your mistake. The so-called experts have no freaking idea what they're doing. And I don't care if you're on the left or the right. That's your problem. Now, I have more to say about a particular chairman of the Federal Reserve system as time goes on tonight. But, let me say a little bit, though, about Alan Greenspan, who bears great responsibility for the current crisis. And yet, here's Greenspan, who just a few months ago gave this inane speech in which he said, you know, I guess there's a flaw in the free market that I never noticed before. You know, I just, I wonder what that, you know, how could I not have seen this flaw?

10:54Yeah, Alan, I'll help you find the flaw. Why don't you look in the mirror? Maybe it will be looking right back at you. There's the flaw. How about the idea that it's a desirable thing to have a Soviet Commissar in charge of interest rates and money? Maybe that might have a little bit to do with what happened to us. And that has absolutely nothing whatsoever to do with the free market. Some of you may remember years ago, the New Republic magazine had a journalist named Stephen Glass, who got in trouble because he wrote such fascinating stories and it turns out the reason no other reporter had gotten any of these stories was that Stephen Glass made them up. So one story he told, for example, was about a young 14-year-old computer hacker who was such a good computer hacker that corporate representatives would come to him proactively and say, Please don't hack our site. In return for that, here's a new car. The kid can't even drive. Here's a boat, whatever.

11:54He made the story up. There's actually a great movie about this called Shattered Glass. I recommend it. Anyway, Stephen Glass wrote a story in the late 1990s about some Wall Street investment gurus who had built a little shrine to Alan Greenspan. Alan Greenspan. They put a picture of Greenspan, they had some candles around it, and they would gather there and meditate together. Now, okay, so he made that story up, but isn't it kind of odd that nobody noticed that at the time? Nobody said, wait a minute, nobody could possibly have a shrine to Alan Greenspan. Why did that story go by without comment? Because it seemed to be so true. Everybody thought Alan Greenspan is like a god among men. I mean, he's this brilliant genius. He's a genius. He's the maestro. So of course, sure, the idea that somebody might wave incense in front of a sacred image didn't seem totally implausible.

12:47Well, Greenspan is responsible more than any one individual, I would say. We're going to try to pinpoint individuals. I think there are systemic reasons for the crisis. But individuals, Alan is way, way up there. Way, way up there. So what I'm going to do tonight is tell you a little bit about this, sort of defend this statement. And I want to tell you about a gentleman who won the Nobel Prize in Economics. No, not that guy. I'm talking about the gentleman who won in 1974, F. A. Hayek. Now, Hayek was a great genius. I mean, not only was he a brilliant economist, if you actually read his writings on economics in the 1930s, you realize immediately that you are in the presence of a great genius.

13:32But he could write on history, he could write on philosophy, to impress people who were experts in those disciplines, a great genius indeed. What Hayek won the Nobel Prize for was for explaining why it is that the economy moves in a boom-bust cycle. Everybody's doing great, then everybody's in the toilet, then everybody's doing great. Why is that? He wants to know. And he's not satisfied with the conventional answer that, well, that's just the way the free market is, you know, just have to live with it, that's just how markets are, it's I've always been that way, up and down, up and down, this is just such, not an explanation, this is a name, a non-explanation, or the psychological claim, that, well, you know, the investment world is moved by animal spirits, you know, it's just, it's a psychological disposition, so that investors sometimes just become, they become pessimistic to an unwarranted degree, we need to get them more optimistic, you know, if real, if real imbalances in the economy

14:35Hayek corrected simply by changing the psychological states of mind of investors. Why don't we devote all our research money to a happy drug for investors, right? So we'd never have the old bus cycle. But Hayek wants to find real rather than psychological explanations for what's going on. And I don't mean that psychological explanations for things aren't real. I mean real in the sense that they involve resources, they involve structural issues. So Hayek's theory proceeds as follows. It begins with a question. Why is it that when we experience a bust like we're seeing now, what we're seeing is a massive cluster of error? That's a term that the British economist Lionel Robbins used in his book, The Great Depression, in 1934.

15:23is a cluster of error by which he means all of a sudden we're seeing retail stores and some even longer term higher order investments like mining, manufacturing, whatever. We're seeing losses being made on a massive scale in all different sectors of the economy. Now, it's not that everybody is making losses, but a very substantial portion of market actors are suffering losses. He wants to know why should that all happen in a clump like this, especially when you consider that the market has a natural way to weed out people who are bad at forecasting consumer demand. If you're bad at this, you make losses. If you're really bad at it, you go out of business. And your capital is then transferred to people who are better at forecasting consumer demand.

16:12So in other words, those who are in the private sector, who are private actors, are in effect in an election every day, and we cast the votes with our dollar bills. They're in an election every day, and so those who keep getting elected, because they're adding value to the inputs they're putting into their production processes, they get command of more capital. So these are people who are making good decisions. So why should people who are selected by the market to be good forecasters suddenly make dreadful forecasts that are all wrong in the same direction simultaneously? Isn't that at least, you know, worth wondering about? So Hayek wants to answer that question. And he gives an answer that, as you'll see, exonerates the free market and shows that there's something else at work here than mere private actors engaging in voluntary exchange.

17:07There's another actor on the scene that is introducing discoordination throughout the system, and that's the central bank. Hayek's theory goes as follows. Now, follow me on this. There is no one on earth who cannot understand this theory. There are a few exceptions who also happen to be Nobel Prize winners. But there's nobody in this room who can't understand this. That was a cheap one. That was just the red meat for those of you. He says, now, interest rates. Now, follow me. You think interest rates. Oh, I knew the technical part was coming. No, I'm telling you. This is not hard. Interest rates can come down in two different ways. The first and healthy way they can come down is that you and I save more.

17:56Now it's not difficult to understand why that leads to lower interest rates. If we save more, then the banks have more on hand to lend. So to make a long story very short, the price of lending goes down. They have more to lend with. So just like the supply of anything goes up, the price tends to go down. Okay, so that's how interest rates can come down naturally. Now this is an essential point to understand But here we see how the interest rate performs, and when I say the interest rate, I'm really speaking of a whole structure of interest rates. There isn't any one interest rate in the economy. If you go in and get a loan, you're going to find different people get different interest rates. We're talking really about a structure of interest rates, but for shorthand, I may slip into saying the interest rate. Now interest rates perform an essential coordinating function in the economy.

18:43They're not just arbitrary numbers that can just be fiddled with. They perform an essential coordinating function. The first function they perform, and both of these functions involve coordinating production across time. The first function is they, in effect, make clear that consumers are deferring consumption for the time being. That is to say, although consumers continue to consume, they're not consuming everything that they've earned, everything that they have a right to. In other words, I work for some factory, I make $100. That $100 bill entitles me to go back into the economy and claim $100 worth of stuff. But if I save, I put $40 in the bank and I consume only $60 worth, I've saved the remainder.

19:29And this has two important results, both of which are healthy and coordinate. The first is, businesses engage in long-term production when interest rates become low. And the longer-term their project is, let's say it's a 10-year project, it's not going to start churning out products or turning a profit for 10 years, a slight reduction in the interest rate can mean all the difference in terms of the profitability of the project. And anybody who has a 30-year mortgage knows what I'm talking about. The first year when you're making your mortgage payment, okay, here goes my $2,000 mortgage payment, and then you see the next month's then you pay $300 in principal. What in the world happened here? Because the mortgage is so long. If it were just a one-year mortgage, obviously we'd pay far less in interest.

20:16So the longer-term the investment that a businessman is engaged in is, the more interest rate sensitive it is. So when interest rates go lower, it's these longer-term things that are far, far removed from finished consumer goods, like mining, manufacturing, capital goods, long-term projects that are given a stimulus. Well so here we see the coordinating function. At the very time that consumers are saying, I'm going to consume a portion of my income in the future, that's also the time that business firms are producing for the future. So there's a time coordination mechanism. But secondly, remember my point about how if I earn $100 and I spend only $60 and I put the other $40 in the bank, I have in effect released $40 worth of resources that I'm not going to consume right now.

21:03Well, these saved resources in the economy that are not immediately consumed provide the material wherewithal to see all these new investment projects through to completion. So again, this is a very smooth process. Now, let's consider the second way interest rates can come down, and that's when the central bank established by the government, in our case the Federal Reserve System, forces them down artificially. Now, for time purposes, I'm not going to go into open market operations and things of that nature. That's in not only my book, but many other books. For our purposes, all we need to know is that the Federal Reserve has the power to influence interest rates downward or upward. So let's suppose the Federal Reserve system decides, let's create prosperity. So let's force interest rates down.

21:48Well, here you have in the short run the same consequences. You have low interest rates, you have businesses beginning long-term projects, you have apparent prosperity. But while interest rates that come down because of voluntary saving lead to genuine economic growth, interest rates that are pushed down artificially by a government-created central bank create boom and bust. In the first case, we were talking about how one coordinated function is that I am going to consume in the future, so businesses prepare for that in the future. But in our example with the central bank, just because the central bank forces interest rates down, that doesn't mean the public is going to defer this consumption to the future.

22:39The public may be consuming more in the future, so now we have businesses engaging in long-term production projects at a time when people's consumption desires are to consume right now. So there's a mismatch, there's a time mismatch. So at the very time that people are demanding more of existing products now, businesses are misled into thinking now's a good time to engage in long-term product development of new products. That's a market mismatch. That can't be sustained. It's going to be a bust. Secondly, just because Ben Bernanke or Alan Greenspan says, you know what, let's force interest rates down to 1%. Let's just get it way, way down there. Well, that doesn't release any saved resources into the economy. In our first example, people genuinely abstained from consumption, thereby releasing resources for use by investors.

23:27What happened in the second case? But yet, meanwhile, investors are being encouraged to engage in long-term projects for which the necessary saved resources do not exist. So now all these new projects are going to try to draw from an unchanged pool of savings. They can't all work. There aren't enough saved resources there. Now, what I've said to you here, this should just be common sense. Just because a central bank chairman pushes an interest rate down, that doesn't release the factors of production necessary to see additional investment through to completion. So investors will start engaging in their project and they're going to find that since they're now all competing for the same unchanged pool of resource, their costs are going to be much higher than they thought because they're going to be bidding for an unchanged pool of resources with a lot of other investors.

24:19So now they're going to need more. They need to borrow more to meet these higher costs. Now interest rates are going to head back up, unless the central bank just keeps pushing them down. Now, a great analogy that Ludwig von Mises, the great Austrian economist of the 20th century, gives us, is he says think of the economy as being like a master builder, building a house, but who falsely believes he has 20% more bricks than he really has. Now let's assume for the sake of argument he can't buy any more bricks. Let's just say that he believes that the resource base at his disposal is 20% larger than it really is. Well, what type of house is he going to build? He's going to put down, for instance, foundations that are much broader than he otherwise would. He might even build a house in a slightly different style than he otherwise would.

25:08Now, is it better for the master builder to discover his area in the short run or when he's putting the last brick on the structure? Well, of course, the sooner he finds out that he has a false estimate of his brick supply, the better. Obviously, if he puts the very last brick on and then turns his head and says, Oh, oh, oh, I still have half a story to go, you know, there's no woof and everything, it's all disaster. That's terrible. Now, that's all squandered. He's going to have to tear it all down. He's squandered all that labor time. All those resources are permanently squandered. Society is all the poorer for this. Whereas if he had discovered his error after laying the second row of bricks, well, too bad for him, but at least it's manageable, the error.

25:57Well, the reason this analogy is so useful is that we compare it to the economy as a whole. And so when the central bank artificially brings interest rates down, investors now begin on investment trajectories, which, like the House and the Master Builder example, cannot all be completed with the existing resources. So is it better that they discover this error in the short run or in the long run? Well, we are being told every time we hear by the central bank that the solution to our dilemma caused by artificially low interest rates is even lower interest rates. We need interest rates down to zero. We need, in fact, there are some people who are actually saying zero is too high. I'm not joking about that. Zero is too high for interest rates.

26:44In other words, more of what caused the problem is somehow going to be the solution. Well, every time we're told that, that is exactly analogous to saying to our master builder, figuring out what is the solution to his dilemma and concluding that what we really should do is just liquor him up so he doesn't notice the bricks of wine going down. Just liquor him up so he's just laying the bricks, not thinking about tomorrow. So yeah, you can keep the apparent prosperity going. Sure, he's still employing people. He's still engaged in the building process. Wonderful. Great. But that doesn't make the unsustainability of what he's doing go away. And likewise, just pouring more money, more of the medium of exchange into the economy, cannot correct the structural problems that the initial artificial lowering of interest rates caused.

27:34So, this is called the Austrian Theory of the Business Cycle, because it's been put forth by the so-called Austrian School of Economics. The Austrian School of Economic Thought is so-called because many of its early practitioners have to be from Austria. Menger, Boehm-Bawerk, Hayek, Mises, etc. Although I would say there are far, far more Austrian School economists in the United States today than there are in Austria. Now, there's nothing easier on earth today than to make fun of the Austrian School of Economics, although no one's particularly good at it, I find, but they just do it. They say, oh, nobody believes that, nobody follows these people. Yeah, because that's what we need right now, a popularity contest, sure. Because we all know the mainstream of economics has done just a bang-up job of this. We can't possibly look at competing traditions of thought, now that's just out of the question.

28:23Now, notice that we have just lived through an excellent example of what I've just described. Namely, the case of, what do we do about the master builder running out of bricks? Instead of telling him he's running out of bricks, liquor him up and keep him going. That's exactly what Alan Greenspan did when we had the bust following the dot-com boom. There was another fed-fuel mania where people are investing insane sums in companies that have No profits, no customers, nobody knows what the heck they do, and, oh, I'm going to get rich this way. I mean, every time there is a Fed-fueled boom, everybody on earth thinks, I can make a million dollars in the stock market. Everybody immediately thinks there are get-rich-quick schemes. I can flip houses, I get rich in the stock market.

29:09And so, you know, you watch that John Beck free and clear home system at 3.30 in the morning. I can show you how to buy a house for $200. Those people have nothing on what the Federal Reserve pulls on them, making them think they can get rich quick with various schemes like this. But anyway, so here we've gone through the dot-com boom and bust. So the bust comes, and greenspin by 2001 thinks, you know what, I'm sick of this whole bust thing. Let's have a boom, man! Time for a boom! So what do we do? Well, all I can do as the Fed Chairman, practically, is lower interest rates. So you know, when all you have is a hammer, every problem looks like a nail. Now notice, the recession in 2001 was the only one on record in which housing starts did not decline.

29:57Now that's very significant because that shows that Greenspan, instead of letting the economy clear itself out, clear out all these investments that shouldn't have been started in the first place, discouraged people from continuing on unsustainable trajectories. Instead of just clearing that all out, it was basically halfway allowed to continue, and because new housing starts didn't decline, it was right at that time that people began to hear the myths of the housing bubble, that housing prices never go down. Apparently everything else goes bust in recession, not housing. Housing prices never go down. A house is the best investment you can make. You can make quick money by flipping houses. This all takes root because old Alan won't let the economy take its medicine then.

30:43And so, sure, he holds off the recession. Congratulations! Yeah, he held it off. And now look what we're facing. Much worse. Because we've all been on this unsustainable trajectory all those intervening years. Now, I do want to point out that when Mises gives that master builder example, It's not only a good example, because it's an analogy of producers investing in things that the economy doesn't have the resources for, it's also a good analogy for what can happen to consumers during these artificial booms, because during this artificial boom, where housing prices are going through the roof to crazy, crazy levels, people all thought they were richer than they actually were, and they acted on that false belief. They all thought they had more bricks than they really had.

31:30So sure, a $5 cup of coffee at Starbucks? Sky's the limit, right? It doesn't make much sense, but I'll do it. $7 ice cream cone? Sign me up. This is the way people think. They take out home equity loans, they buy fancy cars, they go on exotic vacations. They do things they wouldn't otherwise have done. They wouldn't have done if they had a real handle on what their actual non-distorted net worth was. So, in effect, the Fed, by making debt extremely inexpensive, encourages people themselves, as consumers, to continue on unsustainable trajectories of consumption that are now being exposed. People wouldn't have done half the things that they've done had they known the truth, had interest rates been allowed to tell the truth instead of being forced to lie.

32:20Now, sometimes we hear things like, well, you know, the housing bubble and all these asset bubbles, these are fueled really by psychological elements. Like there's just a psychological attachment to particular assets at a given time, and that bids their prices up. Now, I don't want to dismiss that explanation entirely. I do think that is a factor. But psychology alone cannot keep a bubble going, as long as this one was going. Because suppose there hadn't been a Fed in the picture. Let's suppose there had been a crazy mania, where people just decided they want to buy a lot of houses. What would have happened is that, okay, just as in our case, price of houses would have gone way up, but the banks would have run out of money to lend. So interest rates would have shot up too, and that would have put an end to the speculation of real estate.

33:05That would have been it. No housing bubble, and therefore no destruction of people's lives when it goes bust. Well, when you have a Soviet Commissar in charge of money and interest rates, who can create all the money he wants to out of thin air, well, he can now flood the banks with additional money, and now it seems like, hey, we've got a time to lend, let's keep this phony baloney boom going. So that's why we can't just, we can't say, HGTV caused the housing boom. Tempting as it is. I mean, you watch that channel, and you feel like, I must be the biggest sucker on earth because I'm not mortgage of the hill to have a $750,000 house. Apparently, the whole world is buying it. You watch people indignantly turn down $3.25 million houses. Yeah, yeah, sure, we like the 6,000 square feet, but no gazebo?

33:56What is going on here? I mean, we are obviously consumed by some kind of Fed-induced mania here. People don't act like this normally. There's something wrong here. Or the house flipping things, really. And you watch those shows, yep, four weeks, I made 50 grand. I mean, I'm telling you, those crooked 30-minute infomercials have nothing on these things. Because people, your neighbor really did make $50,000 doing that. Whereas, you know, whoever made money on John Beck's system, right? Nobody. I mean, so many. Get back. Let me pour John Beck out of this. He's not nearly the crook of the United States. Much as he belongs behind bars, by the way. Now, meanwhile, all this time, the economy has also functioned under what has sometimes been called the Greenspan put, which was the idea that of course Greenspan never put into words, into so many words, but that major market actors understood to me that there was a floor beneath which the central bank would not permit asset prices to fall.

34:56So that is to say, go ahead, engage in reckless investing, And if it goes bust, then the monetary authority will pump some money in and bail you out, basically. Now, this is a serious factor here, because consider that I don't remember, in the years of the housing boom and the stock market boom, I don't remember getting a check from AIG or any of these big firms saying, Dear fellow American, we're just embarrassed by the profits we're making these days. I mean, this is just too much. Enclosed is your proportionate share of the profits, sincerely yours. However, I did receive kind of a letter from them saying, you know, this whole thing has gone bust, so here's your share of the bill.

35:44Well, that's exactly the incentive that is given by the Greenspan put. Let me quote you from Anthony Mueller, economist who says, Since Alan Greenspan took office late 1980s, financial markets in the U.S. have operated under a quasi-official charter which says that the central bank will protect its major actors from the risk of bankruptcy. Consequently, the reasoning emerged that when you succeed you will earn high profits in market share, and if you should fail the authorities will save you anyway. The Financial Times newspaper described the Greenspan put as the view that When markets unravel, count on the Federal Reserve and its chairman, Alan Greenspan, eventually to come to the rescue. And in the wake of the dot-com boom and bust of the times, likewise said, that Greenspan was injecting into the economy a destructive tendency toward excessively risky investment, supported by hopes that the Fed will help if things go bad.

36:41Now, what was Alan talking about, about a flaw and difficulty in assessing risk? The Federal Reserve institutionalizes moral hazard because it creates money out of thin air. It has a very cozy relationship with all major Wall Street actors. So when those Wall Street actors go bust, they then go to the paper money producer and ask for a bailout. Why should this be surprising? Why should anybody on earth not have seen that coming? Now, it's been said, in criticism of my argument tonight, that after all, we did have booms and busts in American history before there was a Federal Reserve system, so how can you pin the blame of those things on the Fed?

37:29Well, of course I can't, and I will grant you, in 1819 there was nothing called the Federal Reserve system, so that trivial point I concede. But the substantive point is unchanged because if you look at the major panics in American history, they all have the same cause. There's no Fed, there's no Alan Greenspan, but they have the same cause. There's either a United States government chartered national bank creating money out of thin air, creating phony baloney booms that are based on sand and that eventually dissolve, or it is periodically private banks doing things they'd never be allowed to get away with in the free market, like, uh, numerous times throughout the 19th century when banks would make absurd loans. I mean, ridiculous. During the War of 1812, the New England banks were by and large against the War of 1812, so it was hard for the government to borrow.

38:20So a lot of banks in the rest of the country just started out, they had no money in them, and they just started lending. They don't have any actual money, but they're lending anyway. Well, that's the crazy world of banking, and that's possible. But the point is that when that went bust, these banks were told by the federal government, Don't worry, you don't have to pay back your depositors. You have two years to do it. Well, gee, if I had two years, who wouldn't make crazy investments? Who wouldn't be lending out money like that? I mean, just think of the incentive structure that's created for that. Well, let me quote for you from a contemporary who lived through the panic of 1837. Now incidentally, you'll notice panics in American history. 1819, 1837, 1857, 1873, 1893, 1907, then no panics.

39:09The government has made our economy panic-proof by just not using the word panic anymore. Now they only use the word depression. They don't want to use that word either. So now it's recession. So, I mean, I don't know what the next term will be. Sunshine and lollipops or something, I don't know. But here's William Leggett, a New York editorial writer and supporter of Andrew Jackson, and listen to his first-person observation of what's going on in the United States in 1837. And notice how close it is to Austrian business cycle theory, but also notice how the phenomena he's describing are going on in our own time, right now, with the same causes. He says any person who has soberly observed the course of events for the last three years must have foreseen the very state of things which now exists.

40:01He will see that the banks have been striving with all their might, each emulating the other, to force their issues into circulation, issues meaning paper money, and flood the land. He will see that they have used every art of cajolery and allurement to entice men to to accept their proffered aid, that in this way they gradually excited a thirst for speculation which they sedulously stimulated until it increased to a delirious fever and men in the epidemic frenzy of the hour wildly rushed upon all sorts of desperate adventures. They dug canals where no commerce asked for the means of transportation, they opened roads where no travelers desired to penetrate, and they built cities where there were none to And incidentally, some of you may have read about what just went bust in Las Vegas.

40:50They have a 65-acre little mini-city they were building. Now, if that isn't a bubble project, I don't know what is. This is obviously not a sustainable, sensible free market project. That's only going to go on as long as the monetary spigot keeps flowing. So, yeah, sure enough, we have cities where there are none to inhabit going bust. Let me point out, by the way, where the monetary authority pours money into the economy Some people think this encourages economic growth. No, it doesn't. It distorts the path that capital would normally take. Normally the free market would say, no, you are not going to build a 65-acre little private city. That is just not going to happen. The resources don't exist for it. The demand doesn't exist for it.

41:37But when money is artificially cheap, crazy projects get to bid for capital at the same table with normal projects. And so all through the boom, the phony prosperity that we're seeing, what's actually happening, is crazy projects are diverting wealth from normal projects that cater to real human needs, not phony baloney crazy needs like the 65-8 or city. Now, but here's the quotation that gets really to the heart of the Austrian view. And again, this is 1837. What has been, whatever must be, the consequences of such a sudden and prodigious inflation of the currency, business stimulated to the most unhealthy activity, a vast amount of overproduction in the mechanic arts, a vast amount of speculation in property of every kind and name, at fictitious values, and finally, a vast and terrific crash when the treacherous and unsustainable basis crumbles beneath the stupendous fabric of credit and the structure falls to the ground, burying in its ruins thousands who exalted in the fancy security of their elevation.

42:48Men nowadays go to bed, deeming themselves rich, and wake in the morning to find themselves strict of even the little they really had. This is getting a little too close for comfort, isn't it? They count deluded creatures on the continued liberality of the banks, whose persuasive entreaties seduce them into the slippery paths of speculation. So think here of house flipping in the housing bubble. But they have now to learn that the banks cannot help them if they would, and would not if they could. They were free enough to lend their aid when assistance is not needed, but now when it is indispensable to carry out the projects which would not have been undertaken. is taken, but for the temptations they held forth, no further resources can be supplied.

43:34Quite interesting indeed. Now, it's also noteworthy that we see throughout the history of American panics and boom-bust cycles that people are always noticing that lending standards seem to decline during these periods. So this is again a misplaced emphasis right now. Everybody's saying it's Community Reinvestment Act in the federal government. Yes, it is. That is definitely part of it. The federal government does seem to believe in the Bread from Stone's philosophy of economics that you can create something out of nothing and that wealth is a shortcut to wealth that does not involve saving, production and entrepreneurial skill. But, think of the logic of it. When the Fed increases the supply of money, and it does so through the banking system, the banks now have more to lend.

44:19And given the incentive structure that exists in our banking system right now, they want to lend the maximum that they're allowed to lend. But now think of this analogy. Imagine I'm a basketball coach, and I've suddenly told 10 minutes after I'm able to choose all my players, Oh, by the way, we've changed the rules. You can choose two more players. Well, inevitably, I have to choose the additional players from a pool of people I had initially rejected. Same goes for lenders. Where are they going to get the additional people to lend this money to? from a pool of people they would otherwise not reject. So naturally and inevitably the lending standards come down. So again it becomes important to look at the root causes, not just look at the symptoms. We've had enough of that. We've had enough of thinking that maybe umbrellas are causing the rain.

45:04We have to look at the root causes of what's going on. I suggest to you that something is wrong with our money. Now we're not supposed to say that. I was supposed to say, the experts are in charge, they'll give us the best money they can give us, and sure, we have a Fed chairman who can create two trillion dollars on a good afternoon, hand it out to people, and then not even have to tell us where it's going or what collateral needs have been. I mean, again, I don't care where you are in the political spectrum, that is an unbelievable abomination. There is nothing either conservative or progressive about that. And so that's why I'm so glad that H.R. 1207 is making its way through Congress to audit the Federal Reserve. Did you imagine a Congressman voting no on that? No, you know what? No. I think I want to have a secretive organization in charge of the money.

45:57I think that's what I want. No audit, necessarily. But something is wrong with the money. What we've seen, and what I hope I've at least made you think about in what I've said about business cycle theory, is that artificially manipulated, unbacked paper money can give us bloom and bust. And then when the bust comes, those major firms that have gone bust then turn to the paper money producer and ask for a bailout. And they usually get what they want. Now, is this so obviously the best conceivable system that all non-trivial alternatives are to be dismissed out of hand? And yet, do we even hear this subject even broached on CNBC or whatever other morons we're listening to, basically?

46:47Boy, John Stewart really nailed CNBC. I mean, really, a dark war would have been like three times as good as the advice you would get in there. By the way, there goes my chance of ever being on CNN to see this person out the window. But, in any event, we're not hearing this. We're not hearing anything like this. All we're hearing is, we need more regulation. You know, we need the system as it is. Just a little more regulation. But again, I think that is just intellectual laziness of the most contemptible sort. Because, as we're seeing, there are systematic institutional factors that are leading to the unhappy outcomes we're witnessing. A little more regulation is totally beside the point. As long as you have a monopolistic paper money producer, you can try to fill up every hole with all your regulations you want to, but that money is going to find some outlet and there's going to be some bubble somewhere else.

47:44We need to go to the root causes. Now, when it comes to regulation, typically, yeah, sure enough, if we could devise regulation that might be able to prevent this specific kind of meltdown occurring again. Wonderful. It's just like the TSA telling you to take our shoes off. There'll never be another shoe bum. Okay? Yeah, okay, I agree. You've got a 100% chance there'll never be another shoe bum. So if we ever have a time machine, we travel, and it will bring your technology and will catch the shoe bum. And like, well, sure, you can devise something so that specifically end run will never happen again, or specifically this. Meanwhile, these things have terrible side effects, as Sarbanes-Ockley has had, making capital flee like there's no tomorrow from the United States.

48:29So, again, we're not looking at the root causes. Where are these firms that are leveraged up and they're making all these crazy bets? Where are they getting access to all this cheap money? I mean, again, what are the root causes? And in terms of the mortgage market, well, that's very heavily regulated. And in fact, let's remember, the mortgage lenders were just doing what the government obviously wanted them to do. George W. Bush wanted to create an ownership society. This is a long-standing neoconservative policy goal. This is not a progressive thing, although there are progressives who agree with at least the principle of the idea. But this is a government policy. It was George W. Bush who said, you know, we need to tax people so that we can take that money and make down payments for people.

49:17Because the down payment is sort of an archaic method of ascertaining credit, and so we should just get rid of it. Whatever's standing in the way of everybody having his own home, we should just get rid of that. I won't even get into it. You should listen to Peter Schiff on why it makes more sense to rent half the time. Give the landlord all the headaches, you just enjoy the pleasure of putting them in. You are not throwing your money out the window by any means doing that. Okay, I wish I had a glass of water. Is this for me? Oh, good. I was hoping you were going to say that. Oh, two more. Well, I'm not planning to go on that much longer, so pardon me for a second. Okay, good. All right. Let me start sort of wrapping things up there. I think I've condemned the Fed sufficiently.

50:08I just want to say, by the way, one last thing about the mortgage market is that there were regulators looking at it, the Fed's regulators. Ben Bernanke, our Fed chairman, told us around late 2006 that his regulators had investigated the mortgage market and found it was in better shape than ever. So there are the experts again. So again, we have to trust regulators for our well-being. Yeah, okay, we had some. So you're going to tell me that we're going to be able to find regulators who are going to have the backbone to stand up and tell the Federal Government the opposite of what it obviously wants to hear, which is that the mortgage market is in great shape. To me, we have to rely for our prosperity on the backbone of a few regulators who are going to have the courage to stand up against the entire Federal Government, all of academia, and all of the media.

50:59Well, you know what? I think I need maybe a firmer foundation for American prosperity. We should demand more. As we observe what the Federal Government is doing, it is of course doing exactly the opposite of what it should be doing. I mean, every single time, without fail, it does exactly the opposite of what it should do. And now, the opposition party, such as it is, has sometimes been better than it has been over the years, although what credibility the opposition party could have on fiscal responsibility is totally beyond me. I've had people say, you know, why weren't you criticizing George W. Bush? I was! That's all I've done for years, right? It was like my whole career, criticizing this.

51:47I just don't know what to do with myself. I have to keep erasing Bush and typing in Obama. However, the criticism is still the same. You know, you're still a warmonger, you're still against civil liberties, you're still for the drug war. You know, you're still basically the same guy, except you get better speeches.

52:11Now, when I say the opposition party, though, some of them have been sort of okay with this. But others, their response is to say, well, you know, if our party had drafted the stimulus bill, we would have blown the 800 billion on different things. I think that's not really the point. Because consider what Austrian business cycle theory implicitly suggests needs to be done during the downturn phase. Now, strictly speaking, strictly speaking, I'm not talking about the genuine pain that real human beings are enduring right now because of what the Fed has done to us. I'm not in any way disparaging them. But when I say to you that the recession or downturn phase is actually the restoration of health to the economy, I mean this in a macro sense.

53:02What I mean is that it is actually during the boom phase that the damage is done. Because it's during the boom phase that the master builder of our analogy is building a house he can't possibly finish. And therefore he is squandering our wealth and making us all the poorer. It is during the boom phase that investors are engaged in projects for which there is insufficient demand and for which the necessary resources do not exist. They are squandering resources and making us poorer. That's where the damage is done. The recession is the phase in which the economy tries, against every effort of government, to sort this out, to stop and say, all right, we have got investment lines that make no sense. We have to sort out which of these projects is sustainable and rational, and which of these projects is just a bubble project that can persist profitably only so long as the monetary spigot is unleashed.

53:57And as I've said, it is a bad thing for genuine wealth generators to have to compete with activities that can exist only so long as artificial money is pumped in. That is bad. That makes us poorer. We should want those businesses to go out of business. If people are now deciding, hey, I'm not as rich as I thought I was, I don't want that $7 ice cream cone anymore, if Cold Stone Creamery starts closing some shops, that is a good thing because that was a squandering of resources in the first place. We are poorer if we prop them up. We don't want to. That just sucks more resources into them. And I don't mean to single them out. If some of you work for that company, I'm sure they make wonderful, not the point. But that's what the economy is trying to do. It is trying to reprice assets. It's trying to reprice all kinds of consumer and capital goods to figure out what's profitable, what isn't. Liquidate what's unprofitable

54:49and shift those resources into producing things that people want, that are sustainable. So you don't crop up failing firms, you let them go, because all you're doing is sucking wealth that is necessary for the wealth generating sectors of the economy. You certainly do not interfere with wages and prices. They need to fluctuate. Wages may need to come down in some places because we've overproduced them. We don't need that many people working there anymore. We need to reallocate labor elsewhere. Maybe wages need to go up someplace else because we've artificially starved this industry in the meanwhile. These things need to be allowed to proceed through the natural nexus of voluntary exchange of buyers and sellers figuring out where this all should settle out. Now, meanwhile, what we've instead had, and of course, by the way, don't keep printing money, obviously, that's what caused the problem.

55:41Don't keep forcing interest rates artificially low, that's what caused the problem. So don't do that. So what are they instead doing? Well, they're putting interest rates at about zero, they're flooding the economy with money, They're making it hard for businesses to go bankrupt. In fact, now we just read this morning that the ex-chairman of AIG is saying, you know, the bailout is fair. We really should have just let AIG go bankrupt. But, you know, some of us were condemned. You know, oh, you hate America because you don't want to support AIG. A totally crooked company, I'm sure, by the way. I don't want to support AIG, so I'm anti-American or something. The qualifications of being a good American seem to change every 10 minutes. All right, so they're trying to do the exact opposite, and then they try this stimulus thing, and I mean, I just don't get how people could support that.

56:31Because what part of this money doesn't exist are people not getting? I mean, sure, it would be wonderful to weatherize 2 million American homes, if we had the money for it. But it would be like me saying to you, okay, you've got all these problems that have been caused by your excessive credit card debt, So, you know, why don't you go put an addition on your house and just take out a loan from the bank? What kind of an answer is that? So, the stimulus is like somebody who drinks Red Bull instead of sleeping and thinks, this is how I'm gonna stay awake, baby. I don't need any of that sleep, baby. I just need Red Bull. Red Bull. Red Bull. That's all I need. But of course we know that Red Bull means that the crash is still coming. That's going to be much worse! Much worse!

57:17What you're really doing is you're exhausting whatever part of your body has not been totally exhausted, is not totally exhausted. Well, likewise, here we've got this diminishing sector of profitability in the economy, and we're going to smash it with $800 billion where a lot of this is borrowed money, which means now the federal government is saying, gee, how are businesses going to borrow? Well, let's borrow half a trillion dollars. Okay, well that's half a trillion not available for the private sector to borrow, not to very much. So the private sector also has resources bid away from it by the government. So now prices go up in these various sectors. The free economy is trying to figure out, again, what should be produced, what should be produced. We have imbalances in the economy. Now unfortunately, Keynesians and mainstream economists, they're all thinking in terms of totally unhelpful aggregates.

58:07We need to get, you know, we need this amount of investment, this amount of consumption. We're all thinking in terms of aggregates. The aggregates are totally useless to us right now. It's not that we need more or less investment. It's what kinds of investment do we need? What I've described to you tonight is a very sophisticated view of capital that views capital as existing in a series of stages, far away from the consumer, and then ever closer in stages, so mining has been very far from consumers and then manufacturing all the way down, all the way to a retail store or services and right down to the consumer. But for mainstream economics, capital is just one letter, K, and that's their variable for capital. So they can't even perceive the problems I'm describing, because what I've described is the capital structure has been totally discombobulated Because the interference with interest rates makes the higher order stages of production artificially more profitable.

59:02Well, they don't even see that. All they just see is K. They just see capital. They don't see that it's different stages that have been artificially stimulated. So what we need is, again, we need different kinds of consumption. Instead of $7 ice cream cones, you know, $1 cups of coffee. Instead of this, then that. That's what needs to be done at a micro level. And, as I say, every single thing the federal government is doing is interfering with that process. Now you may say to me, finally, this will be my last point, I promise, I'll finish the stimulus thing just by saying, I wrote an article on the stimulus package, which I would have written if John McCain had passed it, by the way, I was, in case anybody's wondering, I was against John McCain, who I thought was an absolute disgrace and an embarrassment. Any of the other things that I have to say. It takes a lot of courage to get up for a crowded boulder and say you're against John F. Kennedy.

59:52But anyway, so I wrote this article called Two Fairy Economics that I think you might enjoy. My website is called TomWoods.com. You can check that out there. But there's an interesting example of American history I just want to give briefly. And that's 1920-21. Nobody remembers there was a depression in 1920-21. But yet, that depression, which went on for about a year and a half, the first year of that was worse than the Great Depression of 1929. And so, in terms of unemployment, production collapsing, everything else. So, what did they do to get out of it? Did they have a stimulus package? To the contrary, no, it was their no stimulus package, misnamed stimulus package. To the contrary, the federal government cut its budget, which every textbook tells you, oh no, can't do that, that will interfere with aggregate demand and all this.

1:00:38Well, who are you going to believe? The textbooks are your own eyes. What did the FED do? The FED was largely passive in all this. In fact, the FED didn't even start engaging in open market operations until 1922. By mid-1921, the thing is over. The economy has recovered. It has a very robust recovery. Now, conversely, when we think of Japan or other episodes in American history, when we see governments saying, all right, everybody, we're going to roll up our sleeves and solve this thing. And they proceed to do every single thing Hayek's theory implies they should not do. It goes on and on and on. They just wonder, jeez, gosh, big business is even more evil than we thought. They're just deliberately holding back. Come on, you know, I mean, can we at least try a different one?

1:01:24Because it seems to me we've been listening quite long enough to the Ben Bernanke's of the world, the Hank Paulson's who told us that the economy was stronger than he'd ever seen in his whole life. We've listened to all these, you know, childish types, no idea what they're talking about. It seems to me we ought instead to listen to some of the people who, and yes there were some, who predicted the current crisis, not just because it was just at random or they had a, they had a, they were soothsayers, they had a crystal ball. but Jim Grant, Grant's interest rate observer, Jim Rogers, Peter Schiff, and Congressman Ron Paul. Now Ron Paul was made fun of, oh, how could you say, how could you hurt, the fundamentals of the economy are sound. Everybody got that memo. The New York Times, the Washington Post, everybody got that memo. The fundamentals of the economy are sound, what's the matter with you?

1:02:10And he warned that there was something wrong, yet are these men's phones ringing out the hook? Is anybody calling them for advice? No, no. The rule of thumb under the previous administration, as under this one, Again, it's a revolving door of more or less the same people. I could easily see Geiger having been appointed by John McCain. Very easy to see that. I could see a lot of these foreign policy people having been appointed by John McCain. Very easy to see that. It disturbs me that Bill Kristol, who is evil embodied, says that he heard Obama's Afghanistan speech and he said, all hail Obama. Wake up, people. It's the same bunch of people doing this to us. The more blindsided you were, the more totally clueless you were, the more you predicted the exact opposite of what happened, the more we want to hear from you.

1:03:02Instead, it seems to me we could stand to hear from an alternative tradition that has been suppressed for years because it does not say what governments want it to say. It does not say, you are the saviors who can create, like God himself, out of nothing. You can't do that. You cannot do that. Wealth can't be created that way. All you can do is get in the way of private actors who are trying to coordinate a vast, vast structure of production across almost 300 billion people, and that when a bust comes that you caused, you better stay out of it because all you can do is make things worse. Well, they have history on their side, they have sound theory on their side, and they have common sense on their side. It seems to me that if we listen to these people, that that would be change we can believe in.

1:03:50So, thank you very much.